Fiscal Policy Fact Sheet What is fiscal policy? Changing the levels of public spending and taxation in order to affect aggregate demand. Expansionary Fiscal Policy During a recession, it can help the economy to recover, reducing unemployment and increasing output by boosting aggregate demand as a result of increasing public spending or lowering taxes. Government spending is a component of AD and so increasing it will increase Aggregate Demand alongside cutting taxes on incomes and firms` profits. By doing so, people end up with more money to spend as the level of demand creates jobs and boosts output. Deflationary fiscal policy Attempts to lower demand and demand pull inflation by cutting public spending as well as raising taxes. This may reduce employment and reduce growth as AD is being lowered. Criticising Fiscal PolicyDifficult for government to work out exactly when, how much to increase/decrease public spending, or cut/raise taxes. If demand rises too quickly compared to supply, demand-pull inflation can occur as could raising taxes too much which may heighten unemployment.If taxes are too high, people and firms work less affecting productivity and lessening output. A fall in productivity raises firms' costs and firms become devoid of quality of their product against overseas competitors. Demand for their goods/services will decrease and cause a rise in unemployment. Workers may begin to fear the future of goods' prices and so demand higher wages. The rise in wagers increases production costs, reduces the demand for labour and causes cost-push inflation alongside rising unemployment.Expansionary fiscal policy will increase the budget deficit due to the fall in taxes and increase in public spending. In the future this will mean higher taxes.